Class action law suit against exchanges, broker/dealers and HFT firms

Hat tip to Wall Street on Parade for bringing the filing of an encouraging class action law suit to my attention. See the class action statement of complaint for violation of Federal Securities laws here: City of Providence, Rhode Island et al vs. BATS et al. The Defendants include all the major stock exchanges, broker/dealers (Goldman, JP Morgan, Citi)… and HFT firms that have been flagrantly abusing customers and investors in public markets over the past 5 years.

The really encouraging part is not only is the Plaintiffs’ counsel known for their expertise in securities fraud and successful claims in high profile cases such as Enron, Worldcom and Visa/Mastercard anti-trust etc., but aided by The Flash Boys research, they have beautifully cut through the intentional confusion and complexity of current financial intermediaries to succinctly frame the particular offenses in law. To wit, directly from the pleadings:

“Defendants’ misconduct rigged the market and manipulated the prices at which shares were traded during theClass Period, causing substantial damage to Plaintiff and the Plaintiff Class as a result thereof.

Defendants’ Scheme and Wrongful Course of Business

For at least the last five years, the Defendants routinely engaged in at least the following manipulative, self-dealing and deceptive conduct:

“electronic front-running”– where, in exchange for kickback payments, the HFT Defendants are provided early notice of investors’ intentions to transact by being shown initial bids and offers placed on
exchanges and other trading venues by their brokers, and then race those bona fide securities investors to the other securities exchanges, transact in the desired securities at better prices, and then go back and transact with the unwitting initial investors to the their financial detriment;

“rebate arbitrage” – where the HFT and Brokerage Firm Defendants obtain kickback payments from the securities exchanges without providing the liquidity that the kickback scheme was purportedly designed to entice;

“slow-market (or latency) arbitrage” – where the HFT Defendants are shown changes in the price of a stock on one exchange, and pick off orders sitting on other exchanges, before those exchanges are able
to react and replace their own bid/offer quotes accordingly, which practices are repeated to generate billions of dollars more a year in illicit profits than front-running and rebate arbitrage combined;

“spoofing”– where the HFT Defendants send out orders with corresponding
cancellations, often at the opening or closing of the stock market, in order to manipulate the market price of a security and/or induce a particular market reaction;

“layering” – where the HFT Defendants send out waves of false orders intended to give the impression that the market for shares of a particular security at that moment is deep in order to take advantage of the market’s reaction to the layering of orders; and

(Since the publication of Flash Boys, the U.S. Federal Bureau of Investigation (“FBI”) and the U.S. Justice Department (“DOJ”) have both announced they are investigating high frequency trading. The DOJ is investigating whether the activities violated the federal insider trading prohibitions. Likewise, New York Attorney General Eric Schneiderman (the “NY AG”), the Commodity Futures Trading Commission (“CFTC”), and the SEC are also reportedly probing the unlawfulness of high frequency trading. Case 1:14-cv-02811-KMW Document 2 Filed 04/18/14)

“contemporaneous trading” – whereby obtaining material, non-public information concerning the trading intentions of Plaintiff and the Plaintiff Class and then transacting against them, Defendants violate the federal securities laws, including §20A of the Exchange Act.

Defendants’ wrongful acts and unlawful practices constitute the manipulative use of devices and contrivances in violation of the Exchange Act and the SEC rules promulgated thereunder and constitute a scheme and wrongful course of business that has operated as a fraud or deceit on investors on U.S.-based exchanges and alternate trading venues for at least the past five years.”

It is such a treat to see the illegal actions so clearly articulated. A great start to hopefully a fruitful, sea change law suit against some very culpable actors.

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